Do I Refund in BTC or USD?

The question about how to handle Bitcoin refunds is up for debate. Bitcoin volatility will no doubt increase the chances of the following issue becoming a problem for merchants who decide to accept Bitcoin. Here is a scenario I worry about:

Scenario: I am a merchant, and I sell a $5 item (.007 BTC current market rate). The customer comes back in 2 weeks and wants to return the item, and return it for .007 BTC. However, BTC has increased 50% over the past 2 weeks. So now, .007 BTC is worth $7.50.

What are the customer’s rights, and what are my merchant rights concerning this refund? Can I refund the customer $5 at the current BTC rate, or do I have to refund .007 BTC?

If this needed to be mitigated in court, what are the arguments for both parties? This tactic could be used to swindle both customers and merchants.

For now, in America at least, it seem the consensus is that merchants should include in their TOS that all sales and refunds are in USD. While you can advertise that you accept Bitcoin as a payment option, all items should be advertised for sale in USD only. If a customer buys an item for $5, then the refund will be for $5, regardless of what the current Bitcoin exchange rate is. However, if you advertise items for sale in BTC rather than USD, you will most likely be hard pressed to refund the item in BTC as well. If BTC does indeed continue to skyrocket, this could pose a major problem to retailers. It would be advisable to discuss this with your personal legal and accounting council in greater detail.

UPDATE 12/8/2013: I have realized now that it is almost impossible to perform a 1 for 1 refund if you are trying to issue a BTC refund, but at the current USD rate. For instance, I recently sent $1 to myself between 2 of my Bitcoin wallets. When the transaction was complete, the actual USD amount was $1.13. This was probably due to a 13 cent volatility between the time I entered $1 and the time I hit Send. If I want to return the $5 to a customer and have the Bitcoin network do the calculation, one of us is going to get the short end of the stick – every little penny adds up.

I still am not sure what the legal, or even ethical commentary should be on this matter. For now, I have posed this question to Bitcoin and Legal communities and will update as I receive feedback.

UPDATE 12/12/2013: After speaking with many people about this, from merchants, to individuals, legal professionals, and accountants, it seems the best way for a small business to handle this is to issue USD refunds at the current BTC rate. As one person explained, regarding the volatility of the bitcoin markets, it is no different than selling someone a piece of art. If I sell someone a piece of art for $100, and the artist’s work skyrockets in value 2 weeks later, that does not give the customer a right to return the art at the higher value. The transaction is understood to be in USD at the time of transaction, not matter what other processes are involved. Yes, it would be advisable to make this clear in your TOS, or even during the sale of the items, but this is the solution which would mitigate the most amount of risk for both the merchant (if BTC rises in value) and the customer (if BTC falls in value).

UPDATE 1/9/2014: Overstock.com began accepting Bitcoin today. Their return policy, while not stated on their website, is to issue store credit in USD for all Bitcoin purchases. This differs from their return policy, which offers full refunds in certain cases. Still, refunding in current USD equivalent seems to be the favored solution by the community.